The Sunday Mail
Clemence Machadu Insight —
Howdy folks! Next Sunday will be Christmas, that unique moment of the year when families and friends unite to celebrate the birth of Christ.
The season is already heavily pregnant with euphoria as folks busy themselves with final preparations to give the necessary justice to Zvita (Thanksgiving).
Who doesn’t have something to give thanks for – life, good health, beautiful families and friends, you name it. But prior to Christmas, we also have an important day to mark – Unity Day – on December 22.
Folks, this is a very important day in our Motherland, as it set a precedent that we continue to cherish. Unity is a key ingredient for the prosperity of our nation. It reminds me of then Prime Minister Robert Mugabe’s speech on the eve of our Independence Day in 1980.
Said President Mugabe, “As we become a new people, we are called to be constructive, progressive and forever forward-looking; for we cannot afford to be men of yesterday, backwards looking, retrogressive and destructive.
“Our new nation requires everyone of us to be a new man, with a new mind, a new heart and a new spirit. Our new mind must have a new vision and our hearts a new love that spurns hate, and a new spirit that must unite and not divide.”
Folks, aren’t these wise words gaining more meaning by the day? In the present context of factionalism, corruption and political malfeasance by the unsaid, these words should not be a cry in the wilderness, but a voice of reason.
Let us preach unity in our family, unity at our workplaces, unity in our communities and unity in our nation. Our hearts should be tied together in patriotic love!
But coming to the issue of the day, our economic outlook for 2017 is going to have to deal with interest rates challenges that may affect our macro-economic environment.
Zimbabwe’s usage of 10 monetary currencies means that the country is vulnerable to the monetary decisions made by a number of countries in their own interest.
While we are waiting for our own monetary policy for 2017 to be announced in January, monetary decisions announced by the United States yesterday will by and large have a number of consequences for Zimbabwe’s economy.
The US Federal Reserve, which prints the greenback that is the dominant trading currency in Zimbabwe, raised interest rates for the first time in a year, from 0,5 percent to 0,75 percent.
The Fed further hinted that three more increases will be effected in 2017. This hypothetically means that 2017 might end with the Fed having raised interest rates to plus or minus 1,5 percent.
The increase in the rate of interest will impact every US dollar, irrespective of its location. In other words, the transmission of the impact will also be felt in Zimbabwe.
Interest rates hikes make borrowing expensive. And for Zimbabwe, which already has high interest rates, the move by the Fed will further put upward pressure on interest rates offered in the country.
That means companies seeking to borrow money to increase their production capacities may be discouraged from doing so by the higher rates. The appetite for individuals trying to get mortgages might also decline.
As local banks will be attempting to pass on the marginal premium at which they access loanable funds to the final borrower, the monetary authorities will also try to put more “price controls” handicapping market forces in the financial sector.
In the 2016 monetary policy, the central bank tried to address the issue of high interest rates by capping them at 15 percent, which is still high compared to rates charged by other regional peers.
Some local banks are actually charging above the capped level, with informal money lenders also charging borrowers usurious rates of up to 30 percent per month.
Recently, the Reserve Bank of Zimbabwe also capped bank charges. How much more is the central bank governor, Dr John Mangudya, going to react next year as the venom of the United States’ bite will be flowing deeper into the arteries of Zimbabwe’s economy?
The cost of borrowing for 2017 has already been accumulating immense pressure in the country, given the unsustainable budget deficit of US$1,18 billion that is projected for this year.
Government is likely to finance the deficit through open market operations. Since Government has already issued out a lot of bonds and Treasury bills, their supply has somehow outstripped demand. This means that if Government is to issue out more bonds, it will have to offer a higher interest rate to attract buyers.
That can also affect the financial sector as banking players intending to raise capital will now be compelled to compete with that interest rate.
If Government bonds are paying 5 percent interest, for instance, it means other players competing must offer a higher rate to attract buyers away from Government instruments.
This might, therefore, force banks to raise their bank charges and it also puts upward pressure of lending rates that are already usurious.
The positive side of the increase in interest rates is that the money people have saved in the banks or money markets will earn higher interests. But who is saving in Zimbabwe?
The country’s domestic savings are currently estimated at minus 11 percent of gross domestic product, which means that there is very little to commit for investment.
What is also sad to note is that the decision to increase interest rates by the Fed is motivated by the peculiar challenges of the US economy.
It is, in other words, an American solution to an American problem. For us, it might be a Zimbabwean problem from an American problem. The US raised the interest rate partly to deal with their inflation rate.
Raising interest rates will discourage borrowing and, therefore, reduces consumption, which also reduces demand for goods and their prices.
But for Zimbabwe which is targeting to increase employment, increasing interest rates will not achieve that. Until when shall we continue to be vulnerable like this?
Later folks!
